How long should your personal loan terms be?

Ready to take out a personal loan? Find out the benefits of opting for smaller loan term lengths here. (iStock)

As the U.S. faces economic uncertainty, many consumers are considering personal loans. If you’re looking for a loan to help cover your expenses now, you need to pay attention to how long the loan term is in order to save money on the total cost of your loan. The loan length refers to the amount of time you have to repay your loan.

While each individual and family has a unique situation, all borrowers should consider the same information before determining which length of the loan term to accept. You can compare interest rates and term lengths from multiple lenders by using a free online tool like Credible.

If you’re thinking about getting a personal loan, here are some factors to consider that could affect how you decide the length of your terms.

Monthly payments

Current financial situation

Loan amount

Bonuses or benefits offered by a lender

Personal considerations

1. Monthly payments

When you take out a personal loan, one of the critical factors to consider is the monthly loan payment. If you spread your repayment over an extended amount of time (i.e., five years instead of three), your payment will be smaller, but you’ll pay more for your loan, and you may have a higher interest rate. Often, lenders will offer a lower interest rate on shorter-term loans, according to the Consumer Financial Protection Bureau.

Using Credible, you can see what every personal loans lender has to offer. Just enter your desired loan amount and estimated credit score to see what rates are available.

Typically, lenders offer repayment terms between 12 and 60 months. Here’s an example:

Customer A takes out a personal loan for $5,000 with a 5-year (60 months) repayment plan and 10% interest. Customer A’s monthly payment would be $106.24 per month. At the end of their loan, they will have spent $1,374 in interest.

Customer B also takes out a $5,000 personal loan. They have a 3-year (36 months) repayment term and an 8.5% interest rate (the lender offered a lower interest rate for a shorter repayment term). Their total monthly payments will be $157.84 per month. At the end of their loan, they will have spent $682.16 in interest.

Result: Customer B paid about $50 more per month but saved $691.87 in interest. Plus, they’ll have their loan paid off two years earlier.

You can also estimate your payment options with an online personal loan calculator.


2. Current financial situation

If you’re short on cash each month, choosing a longer repayment term for your personal loan may be a better option for your situation. Lower monthly payments may be more manageable. If you take out a personal loan, make sure you agree to terms you can afford every month.

If you can, a shorter-term loan will save you more money and you’ll be able to pay it off faster.

You should also consider your credit history. Your lender may limit the terms of your loan if they approve your application if you have a low credit score or a spotty credit history.


3. Loan amount

The total amount you borrow for your loan is a crucial factor in determining whether you choose a longer- or shorter-repayment term. Obviously, a larger loan balance over a short repayment term will have much higher monthly payments than a smaller loan over a longer repayment term. The amount of money you borrow can also affect your interest rate.


4. Bonuses or benefits offered by a lender

As you’re comparing rate offers from multiple lenders, ask if they’re offering any special promotions for terms. If you can score lower interest rates for part of your loan repayment timeline, you could save money and pay off the loan quicker.


5. Personal considerations

When you’re considering loan terms, look at your personal situation. Will you have a tax return or other hefty paycheck that could help you pay the loan off quickly? Does the lender have early-repayment penalties? Does the lender require you to have specific repayment lengths?

There is no one right answer that fits everyone’s needs. You’ll need to look at your credit score, financial needs, and your ability to make monthly payments to determine how long to extend your loan repayments.

As you move forward in your search for a personal loan, make sure you consider more factors than just the length of your terms. Other things to consider are the interest rate, whether to choose a secured or unsecured loan and lender fees.

Additionally, consider whether you have any other options like a 0% APR credit card, using cash from your savings account, or selling items from your home. Take time to compare rates from multiple lenders from an online tool like Credible to make sure you have all the information you need to make the best financial choice for your family.